credit documentation is required.  The borrower must meet the credit guidelines established for the program.  This is achieved through the review of credit reports, income documents, bank/benefit statements, etc.

Building Plans & Specifications

Architectural drawings that have been approved by the city or county planning division must be submitted.  The drawings will typically include floor plans, outside building elevations, electrical & plumbing details, and other details of the actual planned construction.

Proof of Lot/Land Ownership

The lender would want to see proof of the lot/land ownership.  If the lot is under contract, a copy of the purchase contract is sufficient.  If the lot is already owned, a copy of the settlement statement or HUD1, which is given at all real property closings, will be sufficient.  In addition, the construction loan could include funds to purchase the lot/land or payoff existing mortgage liens, if applicable.

Property Profile & Line Item Cost Breakdown

A detailed list of the materials that will be used to construct the property(s) and an itemized breakdown of all the costs associated with the project are needed.  This document would assist the lender in devising a realistic budget and working the numbers to determine the final loan amount.

Builder's/Developer's Statement

The project’s builder/developer/con-tractor needs to be approved by the lender.  The success or failure of the project can be in the developer's hands if he/she is not qualified and/or lacks the experience to successfully complete the job.  The documents submitted could include a credit profile, financial statements, licensing, and liability/worker's compensation insurance.

Construction Contract

This is the agreement between the owner and the developer/builder that details the construction project, timeframe, and costs .  It is essential that all parties, especially the developer/builder, be on the same page.

Builder's Risk Insurance

This is the insurance that covers the property loss exposure associated with construction projects.  It will usually cover losses/damages to materials (onsite and offsite), structures, etc.

Appraisal

The appraisal will define what the value of the property will be when it is complete, which is also known as the future value.  The appraiser will utilize either one or a combination of the cost approach, sales comparison approach, or the income approach to determine the value.  In addition, the appraiser will also use the property profile and line item cost breakdown document.  The value defined here will be the basis for the determination of the final numbers for the loan.

After all the documents have been reviewed and approved, the lender will issue a construction loan budget.  The budget will detail the maximum loan amount (determined by the future value of the home), the hard/soft costs, contingency reserves and interest reserves associated with the project.  The hard costs would include those associated with the labor and materials used for the actual construction:  wood, nails, concrete, roofing, etc.  The soft costs are the expenses related to the project:  closing costs, appraisal, building permits, architectural drawings, etc.  The contingency reserves are monies set aside to cover unforeseen costs associated with the project.  Things happen and the lender wants to make sure plans have been made for those happenings.  And last, but not least, are the interest reserves.  The repayment structure of the loan will usually entail interest-only payments and in most instances, the monies to cover these payments are included in the loan as interest reserves.  Therefore, out-of-pocket payments are not required during the construction phase unless the interest reserve funds are depleted.

After the loan has closed, the clock starts ticking.  Some lenders will release monies to cover the start-up costs and others require the developer/contractor/owner to fund the start up.  The construction is usually divided into phases and after each phase is completed, a certified lender-approved inspector is sent to inspect the project.  After a satisfactory inspection, the disbursement funds, or draws, are released.  This process is carried on until the job is complete.  At that time, the temporary construction loan must be refinanced or converted into a permanent loan, if that option is available.

Construction-to-Permanent Loans

A construction-to-permanent loan combines the construction loan and the permanent loan into one loan.  This loan acts like a construction loan during the construction process and after the construction is complete, the loan is converted into a permanent loan.  The loan offers a one-time close, one set of closing costs, and one loan application. 

Acquisition and Development Loans

The acquisition and development loan is a temporary, interim loan for the purchase and construction of larger commercial real estate developments.  Like the new construction loan mentioned above, this loan could cover hard/soft costs, interest reserves and contingency reserves.  The loan will usually require the developer to invest up to 25% of the total project costs.

Takeout Loans

Takeout loans are permanent loans that pay off commercial construction loans.  As mentioned earlier, the construction loan is a temporary loan that needs to be refinanced once the construction is complete.

Mezzanine Loans

Mezzanine loans are used by developers as secondary financing for large, million-dollar development projects.  The primary financing for the project would usually be obtained utilizing the acquisition and development loan.  However, that loan requires a substantial financial investment from the developer.  The mezzanine loan can assist the developer in obtaining some of the funds for that investment.   The loan is collateralized by the stock of the development company.  The loan is appealing to lenders because it is easier and quicker for the lender to seize the stock in the event of default.      

As seen here, there are a variety of financing options for investors looking to venture into new construction projects.  No matter the size of the project, funding, subsidies, tax breaks and other incentives are available.  For those investors that haven't considered new construction in the Chicagoland area, now is the time to start thinking about it.   There are multiple incentives that are available to assist you in successfully achieving your investment goals. 

Knowledge Without Action Is Useless!

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Anita Clinton is the founder of OwnSomethingToday.com, a licensed Real Estate Broker, and Loan Originator.  For more information, visit her website at www.OwnSomethingToday.com or email her at ownsomethingtoday@yahoo.com.